manitoba public utilities board re: centra gas …€¦ · but it's been a while since...

MANITOBA PUBLIC UTILITIES BOARD

Re: CENTRA GAS MANITOBA INC'S

2019/20 GENERAL RATE APPLICATION

HEARING CONFERENCE

Before Board Panel:

Larry Ring, Q.C. - Panel Chair

Marilyn Kapitany - Vice-Chair

Michael Watson - Board Member

Carol Hainsworth - Board Member

Susan Nemec - Board Member

HELD AT:

Public Utilities Board

400, 330 Portage Avenue

Winnipeg, Manitoba

August 16th, 2019

Pages 636 to 708

Transcript Date August 16, 2019

DIGI-TRAN INC. 403-276-7611Serving Clients Across Canada

637

1 APPEARANCES

2 Bob Peters )Board Counsel

3 Dayna Steinfeld )

4

5 Brent Czarnecki )Centra Gas Manitoba

6 Jessica Carvell (np) )

7 Helga Van Iderstine (np) )

8

9 Brian Meronek, Q.C. )Consumers

10 )Association of

11 )Canada (Manitoba)

12 )Inc.

13

14 Antoine Hacault )Industrial Gas

15 )Users

16

17 Lewis Manning (NP) )Koch Fertilizer

18 )Canada, ULC

19

20

21

22

23

24

25



638

1 TABLE OF CONTENTS

2 Page No.

3 IGU PANEL

4 ANDREW MCLAREN, Sworn

5

6 Examination-in-Chief by Mr. Antoine Hacault 640

7 Cross-Examination by Mr. Brent Czarnecki 655

8 Cross-Examination by Mr. Brian Meronek 665

9 Cross-Examination by Ms. Dayna Steinfeld 675

10

11

12

13 Certificate of Transcript 708

14

15

16

17

18

19

20

21

22

23

24

25



639

1 --- Upon commencing at 9:01 a.m.

2

3 IGU PANEL:

4 ROBERT ANDREW MCLAREN, Sworn

5

6 THE CHAIRPERSON: Good morning, all.

7 Mr. McLaren has been sworn in. Mr. Hacault...?

8 MR. ANTOINE HACAULT: Yes, members of

9 the panel. Most other people have introduced

10 themselves. Would it be appropriate for this witness

11 to do so also?

12 THE CHAIRPERSON: Yes.

13 MR. ANDREW MCLAREN: Good morning,

14 Chairman Ring, Vice-Chair Kapitany, Board members,

15 other parties, Board counsel and advisors. Thank you

16 for allowing me to present today. My name's Andrew

17 McLaren. I'm a principal at InterGroup Consultants.

18 I've worked there since 2000, so about nineteen (19)

19 years. And my practice areas have involved utility

20 rate regulation.

21 Over that time period, I've previously

22 appeared before this board -- the first time, I

23 believe 2006, and most recently, 2012 or '13. Mr.

24 Cathcart and I were just discussing when that might

25 have been. But it's been a while since I've been in



640

1 front of this panel.

2 I also have with me today Ms. Davies,

3 who has been helping our team throughout this

4 proceeding as well.

5 THE CHAIRPERSON. Thank you.

6

7 EXAMINATION-IN-CHIEF BY MR. ANTOINE HACAULT:

8 MR. ANTOINE HACAULT: I think there

9 has been distributed to everyone two (2) documents,

10 firstly a PowerPoint which had been distributed by

11 email, entitled direct examination of Andrew McLaren.

12 I believe that would be IGU-14?

13 I'm getting a nod. IGU-14. And there

14 is also a one (1) page table on the revenue cost

15 coverage ratios. Those are Hydro -- historical Hydro

16 table. I believe that would be IGU-15. I had spoken

17 to Mr. Czarnecki about that. I'm seeing -- I --

18 hopefully everybody has a copy of that also.

19 And with that, I would ask Mr. McLaren

20 to proceed with his evidence and go through his

21 presentation and identify this table.

22 MR. ANDREW MCLAREN: Thank you. So I

23 do have a brief presentation for the Board. The

24 evidence in this proceeding that I'll be speaking to

25 includes the prefiled testimony, my prefiled



641

1 testimony, IGU-10, responses to certain information

2 requests from the PUB, Centra, as well as the

3 Consumers' Association. And this direct testimony

4 today addresses issue 17 from Order 98/'19, the cost

5 of service study results limited to options for bill

6 mitigation based on the currently approved and

7 utilized methodology, including the issue of the

8 heating value margin deferral.

9 I also have evidence on this -- the

10 record of this proceeding related to the terms and

11 conditions and proposed balancing fees, which I'm not

12 intending to speak to in this presentation today.

13 So to start with, the approach that

14 I've taken in addressing this topic is that before you

15 get to something like bill mitigation being considered

16 in the context of the currently available and approved

17 cost of service methodology. So I understand the

18 Board has deferred a detailed review of the cost of

19 service methods until the future, so I'm not intending

20 to ask the Board to make any determinations about

21 changing those things today. I -- I will speak to

22 some impacts illustratively about what types of things

23 might be considered, but I'm not going to ask the

24 Board to adjudicate any of those types of things

25 today.



642

1 I will say, though, that before you get

2 to bill mitigation, it's necessary to understand and

3 have confidence in the overall level of revenue

4 requirements and methods for allocating cost to

5 customers before addressing options to mitigate bill

6 increases to customers. I think you need to be

7 satisfied that the revenue requirement is right, and

8 that the cost allocations are reliable before you get

9 to the step of dealing with bill mitigation.

10 There have been several options

11 discussed in the current proceeding that might be

12 characterized as -- as bill mitigation. The first are

13 changes to the allocation of balances in the heating

14 value deferral account, the adoption of a zone of

15 reasonableness, or a ZOR, and deferral of costs

16 related to transmission capital additions for recovery

17 over time. So I'll speak to each of those

18 individually as we go forward.

19 So with respect to the heating value

20 deferral account, the purpose is to keep Centra and

21 its customers whole with respect to nongas revenue

22 which would otherwise be affected by variations in the

23 heating content of natural gas. And I know this topic

24 was reviewed in some detail yesterday.

25 So the basic point is that Centra's



643

1 revenue is at risk when the heating value content of

2 the gas varies. If the gas is hotter, you use less

3 gas, so there is less revenue. If the gas is cooler,

4 you need more volume to get the same energy, and so

5 there is an increased revenue. So that's a revenue

6 risk that arises when Centra has to assume a heating

7 value for rate-setting purposes, and then on an actual

8 basis, that heating value varies, and that creates a

9 difference in -- in Centra's revenues.

10 That revenue risk is different, though,

11 for different classes as a result of the rate design

12 for each class. So Centra currently allocates

13 balances in the account to customer classes based on

14 actual volumes for each customer class. And the

15 reference for that is provided in slide.

16 The current approach does not consider

17 the differences in rate structures and the way that

18 those differences in rate structures influence the

19 revenue risk that Centra experiences.

20 So there have been a few options that

21 have been -- been discussed to deal with this.

22 Christensen Associate Report recommended that Centra

23 only include for customers with monthly bills that are

24 determined according to energy sales volumes. This

25 was accepted by Centra, this recommendation



644

1 specifically for the special contract customers, and

2 indicated that they shouldn't participate in the

3 disposal, and that was in a report dated July 19th,

4 2012. And it's -- the special contract customer class

5 is particularly good example of -- of this issue,

6 because their revenues are based almost entirely on a

7 customer charge which is not influenced at all by

8 variations in heating value. So the revenue risk to

9 Centra if heating value varies is virtually zero

10 related to changes in the heating value for the

11 special contract class.

12 So adopting the Christensen Associate

13 Report recommendation would address that. It would

14 exclude the special contract class, which I believe is

15 appropriate, because by virtue of the rate design,

16 they don't impose any revenue risk on Centra.

17 The CAC evidence also suggests

18 potentially eliminating the heating value deferral

19 account entirely. This approach would also get rid of

20 the problem of matching the allocations in -- in the

21 balances in the account to the revenue risk profile of

22 the different customer classes.

23 I also put forward an opt -- another

24 option that suggested rating the allocation based on

25 nongas volumetric revenue. So not just straight



645

1 volumes, but weighted by the rates, or the revenues

2 that are associated with that. Centra commented on

3 this approach in their rebuttal and provided a table

4 that showed what the impact would be if you adopted

5 that approach. And it was reviewed in some detail

6 yesterday, but I've given the same table here for

7 people to have a look at as well.

8 In summary, this isn't a topic that I

9 would consider bill mitigation. This is a topic that

10 relates to are you tracking and allocating costs

11 correctly? And I think it -- it's very clear, and I

12 believe Centra's accepted that it's not doing that

13 correctly, at least with respect to the special

14 contract class right now by virtue of their rate

15 design.

16 So at a minimum, I think the Board

17 should direct Centra to remove the special contract

18 class from the calculation. And I think the Board may

19 also want to consider changing the rates allocated

20 using the -- the nongas volumetric revenues as an

21 option that may also better match the -- the revenue

22 risk to the recovery of the balances in that account.

23 So then we get into zone of

24 reasonableness. Adapting a zone of reasonableness for

25 setting rates based on a cost of service study might



646

1 be done for several reasons. The first one is it

2 acknowledges that cost of service studies aren't

3 perfect. They use estimates and assumptions, and the

4 Board has commented on this recently in its Order

5 164/16 where it stated that:

6 "While the results of a cost of

7 service study appear to be

8 arithmetically exact, a cost of

9 service study involves considerable

10 judgment.

11 And then more recently in Order 69/19,

12 the Board stated:

13 "Due to the inherent lack of

14 precision in a cost of service

15 study, a zone of reasonableness is

16 used to target the revenue to cost

17 coverage ratios of the customer

18 classes. The Board's approved the

19 use of a zone of reasonableness of

20 95 percent to 105 percent in

21 assessing the revenue to cost

22 coverage ratios of Manitoba Hydro's

23 customer classes. Revenues within

24 that range are deemed to represent

25 full cost recovery."



647

1 So both of those orders are Manitoba

2 Hydro Electric orders, but I believe the principles

3 apply equally to Centra.

4 A ZOR can also reflect a level of

5 confidence that the Board in the existing cost of

6 service study. If we go back to Order 51/96, the

7 Board gave Manitoba Hydro a directive to undertake a

8 study to address certain existing cost of service

9 study issues and the Board directed Manitoba Hydro to

10 assume a ZOR target of 95, 105, which was narrower

11 than the 90 to 110 range that was in use prior to that

12 time.

13 So what I infer from that, and I've

14 seen in other places is, when you do work to make

15 yourself more confident in the results, you may narrow

16 the range that you consider acceptable for a zone of

17 reasonableness.

18 You might also use a ZOR to address

19 goals of gradualism and ratemaking, and the Board

20 commented on that also in its Order 164/16.

21 As I mentioned, that Manitoba PUB has

22 recognized a ZOR of 95 to 105 for Manitoba Hydro, but

23 prior to 1996 the ZOR was wider than that, it was 90

24 to 110, so there has been some movement and some

25 narrowing of that over time, as people get more



648

1 comfortable with cost of service studies.

2 MR. ANTOINE HACAULT: Mr. McLaren,

3 could you please identify, while you're talking about

4 the zone of reasonableness for Manitoba Hydro, the --

5 the table that's been marked as IGU 15, for the

6 record?

7 MR. ANDREW MCLAREN: So Mr. Hacault

8 has provided a table marked as Exhibit IGU 15 that

9 summarizes the revenue to cost coverage ratios from

10 1991 to '92, to 2010, 2011, and this was an exhibit, I

11 believe, from the cost of service review proceeding in

12 2016. It's just provided, and -- and these are

13 revenue to cost coverage ratios using Public Utilities

14 Board approved methods.

15 And I -- I will say you'll notice it's

16 Mr. Bowman's pre-filed testimony, not mine, so I was

17 not present at that proceeding but I believe this

18 table summarizes some of those historic cost of

19 service results in zone -- and revenue, cost coverage

20 ratios for different electric customer classes.

21

22 (BRIEF PAUSE)

23

24 MR. ANDREW MCLAREN: Okay. So I

25 believe I was on the second bullet. The second bullet



649

1 says:

2 "Other natural gas utilities also

3 adapt a zone of reasonableness for

4 setting rates based on cost of

5 service study results."

6 And I -- I know there's been some

7 evidence in this proceeding that Centra in the past

8 has also used a zone of reasonableness, so this is a

9 concept that was not applied exclusively to electric

10 utilities. It's also been in use for natural gas

11 utilities.

12 It's also important, I think, to note

13 that this board has stated:

14 "Consideration of RCC ratios is a

15 rate design matter that should be

16 addressed in the ratesetting phase

17 of a GRA."

18 And that's from Order 164/16. And

19 that's important because I -- well, I know the Board

20 has deferred considering changes to cost allocation

21 study to a future proceeding. I agree with the Board,

22 considering a zone of reasonableness and revenue to

23 cost -- cost -- cost -- revenue to cost coverage

24 ratios is not really a -- a cost of service topic;

25 it's more of a rate design topic.



650

1 So the conclusion from this is, it's

2 reasonable for the Board to adopt a zone of

3 reasonableness for ratesetting purposes in the current

4 proceeding and this doesn't require, in my view, the

5 Board to change anything about Centra's current cost

6 of service methodology to enable that.

7 Also point out a few places where

8 Centra's current cost of service study is at odds with

9 some principles recently adopted by the Board. I know

10 we've had some discussion. It's been quite a while

11 since Centra's -- Centra's cost of service study was

12 reviewed in any great detail by this board, and so

13 because of that we looked to some principles from the

14 more recent electric cost of service study review the

15 Board did in 2016, and in that decision the Board

16 said:

17 "The principle of cost causation is

18 paramount. Further the Board finds

19 that ratemaking principles and goals

20 should not be considered at the cost

21 of service study stage."

22 And the same order also stated:

23 "Ratemaking principles and goals of

24 rate stability, gradualism,

25 fairness, and equity, efficiency,



651

1 simplicity, and competitiveness of

2 rates should be considered in a GRA

3 and not in a cost of service study."

4 So while those are all useful and

5 important things for the Board to consider in setting

6 rates, they're kind of a separate step that, in my

7 understanding, and the Board's review in 2016 said,

8 leave this out of the cost of service study, we'll

9 consider those as part of rate design.

10 And this is in contrast to the current

11 Centra cost of service study methodology which

12 explicitly uses some non-cost causal factors,

13 particularly in justifying the use of a peak and

14 average methodology. So currently Centra's cost of

15 service study embeds that as part of the cost of

16 service method rather than leaving it to be something

17 to be considered in rate design.

18 And the differences in those cost of

19 service methods can drive large changes in RCC

20 ratios. So this is a table that was provided in a

21 response from IGU to the -- to the Utility Board, and

22 I think Mr. Hacault reviewed this in some detail

23 yesterday, so hopefully the table is familiar to

24 people.

25 The first row shows the allocation of



652

1 non-gas costs using Centra's existing method based on

2 the peak and average. You can see the total, 148.5

3 million. In the second row there's a sensitivity

4 analysis that IGU requested that Centra prepare based

5 on using a coincident demand method. And then the RCC

6 ratios for both approaches are shown at the bottom.

7 You can see that for the small general

8 service class, the RCC ratios don't move very much.

9 For some of the other classes, the movement is quite

10 substantial, in particular the special contract

11 customer class. You go from 62 percent using the

12 existing method to about 92 percent using the

13 coincident demand method as modelled by Manitoba -- or

14 by Centra.

15 So this is a -- this is an issue that -

16 - for higher volume customers, higher load factor

17 customers. A lot of costs matter. A lot of cost

18 shifting depends on which of those methods you -- you

19 approve, and so it's quite material to the way rates

20 are evaluated from a cost causation perspective,

21 particularly for those higher volume customer classes.

22 So my conclusion here is that the Board

23 can't have confidence in the current cost of service

24 study that it reasonably reflects the cost of service

25 principles adopted by the Board in Decision 164/16.



653

1 So the Board has some precedent on how

2 it can address issues where it may not have full

3 confidence in the Utility's cost of service study. In

4 Order 143/04, the Board stated:

5 "Because the cost of service study

6 methodology is in a current state of

7 flux and in the Board's view

8 incomplete, the Board can no longer

9 rely on the current methodology in

10 assessing the revenue to cost

11 coverage ratios for each customer

12 class."

13 And in that proceeding, the Board

14 ordered equal percentage rate increases to all

15 customers, and that was a Manitoba Hydro rate

16 application.

17 The Board has also previously used a

18 rider ZOR for Manitoba Hydro, as I've already stated.

19 And so my conclusion there is that given those current

20 inconsistencies between Centra's cost of service study

21 and the principles more recently adopted by the Board,

22 the Board shouldn't adjust rates to reflect RCC ratios

23 at this time.

24 Alternatively the Board should expand

25 the ZOR beyond its 95-105 range to acknowledge these



654

1 inconsistencies. So I think part of what the ZOR

2 allows you to do is say how meaningful is it to drive

3 to a hundred percent if we have some concerns about

4 how meaningful or how accurate this cost of service

5 study is.

6 And then finally on the deferral tran -

7 - for transmission costs, the CAC evidence describes a

8 potential deferral approach for transmission assets

9 for large volume customers, you know, a major reason

10 that these revenue to cost coverage ratios are

11 changing as a result of investment in transmission

12 plants, so transmission-related costs are getting

13 higher. That has a much bigger impact on special

14 contract and other high volume customers than it does

15 on small general service customers.

16 The CAC evidence has described a

17 potential approach to this to be to say perhaps sort

18 of don't start charging those people, those classes,

19 for those costs immediately. Defer a portion of it.

20 It would attract carrying costs while it's being

21 deferred and you could sort of charge those costs back

22 to customers over some time period.

23 That type of approach has legitimately

24 been used in the -- in the past. I think if the Board

25 adopts the other IG recommendations though, the need



655

1 for this option would be reduced.

2 That concludes my presentation. Thank

3 you for your attention.

4 THE CHAIRPERSON: Thank you, Mr.

5 McLaren.

6 Mr. Harcault, that completes your

7 direct?

8 MR. ANTOINE HACAULT: Yes, it is. And

9 Mr. McLaren is available for cross-examination.

10 THE CHAIRPERSON: Thank you. Mr.

11 Czarnecki...?

12

13 CROSS-EXAMINATION BY MR. BRENT CZARNECKI:

14 MR. BRENT CZARNECKI: Thank you, Mr.

15 Chairman, and good morning panel and good morning Mr.

16 McLaren, welcome.

17 Do I understand it that you're here

18 today on behalf of IGU, the Industrial Gas Users?

19 MR. ANDREW MCLAREN: Yes, that's

20 correct.

21 MR. BRENT CZARNECKI: And which

22 members of IGU are you here for this morning?

23 MR. ANDREW MCLAREN: For all four of

24 the members.

25 MR. BRENT CZARNECKI: So that would



656

1 include a special contract class --

2 MR. ANDREW MCLAREN: That's correct.

3 MR. BRENT CZARNECKI: -- customer?

4 MR. ANDREW MCLAREN: Correct.

5 MR. BRENT CZARNECKI: And do all four

6 members adopt your presentation this morning?

7 MR. ANTOINE HACAULT: I'm going to

8 object here. Mr. McLaren, as Mr. Czarnecki knows,

9 filed with this Board a statement of independence in

10 saying that any duty he might owe to any of the people

11 in IGU is overwritten by his duty to be of assistance

12 to this Board.

13 So his expert evidence is expert

14 evidence and he'll be here to assist the Board.

15 MR. BRENT CZARNECKI: Mr. Chairman I'm

16 -- perhaps my counsel opposite has misunderstood, I --

17 I'm not venturing into questioning Mr. McLaren's

18 independence. I'm just trying to figure out whether

19 or not the IGU special customer class -- special class

20 customer adopts the recommendations that are within

21 his report or if they are coming with a different set

22 of options.

23 It was to seek clarification.

24 MR. ANTOINE HACAULT: I understood the

25 question, members of the panel, but that is not a



657

1 matter of opinion and evidence, that's a matter of

2 argument and instructions I will get, as a lawyer, in

3 presenting my arguments after hearing the evidence as

4 a whole.

5 And I indicated that at the very

6 beginning, that the group will be considering the

7 evidence as a whole, and based on the evidence as a

8 whole.

9 Once it's heard, the perspective from

10 CAC, perspective from Centra, and this witness's

11 perspective, they'll be setting out their position in

12 argument.

13 THE CHAIRPERSON: Anything further?

14 MR. BRENT CZARNECKI: I'm not trying

15 to be difficult, I'm just trying to ascertain the

16 confusion here, because I -- I think there was -- was

17 some IRs and Ms. Derksen reminds me about whether or

18 not the IGU special class customer was adopting the

19 evidence of Mr. McLaren, and today it still doesn't

20 remain clear to me whether or not the IGU special

21 class customer is aligned with your examination that

22 you just presented, and if you're here on behalf of

23 all four of the customers, then I would -- would have

24 though the answer was yes. But perhaps it's no.

25 THE CHAIRPERSON: You're maintaining



658

1 the objection, Mr. Hacault?

2 OBJ MR. ANTOINE HACAULT: Yes, it's not a

3 matter of evidence for this witness to answer what IGU

4 might or might not think. He's here to provide expert

5 evidence on a subject that he was asked to provide

6 expert evidence on. He's not here to -- to provide --

7 if -- if there's a question like that, we know there's

8 going to be a presentation by IGU, I think on the

9 22nd.

10 If Mr. McLaren wants to ask a question

11 then, he's more than able to ask it of the person who

12 is going to be presenting here on the 22nd.

13 THE CHAIRPERSON: Thank you. The

14 objection is sustained, the witness need not answer

15 the question.

16

17 CONTINUED BY MR. BRENT CZARNECKI:

18 MR. BRENT CZARNECKI: Thank you, Mr.

19 Chairman, I'll move on.

20 Mr. McLaren, you do realize we're in a

21 natural gas proceeding today?

22 MR. ANDREW MCLAREN: Yes, I do.

23 MR. BRENT CZARNECKI: This isn't a

24 Manitoba Hydro proceeding?




659

1 MR. BRENT CZARNECKI: If I could take

2 you to order 2419, which is the first procedural order

3 for this general rate application.

4 And if we can start page 11, please.

5 And if you scroll to the bottom of the page, please.

6 And I'm on the third last line where I'll read it out,

7 it says:

8 "IGU anticipates reviewing elements

9 of Centra's proposed revenue

10 requirement forecast, cost

11 allocation methods and rate design

12 proposals."

13 Are you with me?

14 MR. ANDREW MCLAREN: Yes.

15 MR. BRENT CZARNECKI: Now, if I can

16 ask that you turn the page to page 28 of the same

17 order. I'm going to look at item number 24. And this

18 is part of the Board order, their findings, their

19 ruling.

20 It says rate design is not in scope

21 except for an update on Centra's ongoing stakeholder

22 consultation process related to its five part rates,

23 being the bundling of its rates.

24 Do you see that?




660

1 MR. BRENT CZARNECKI: And I'm

2 focussing on rate design is not in scope.


4 MR. BRENT CZARNECKI: And the next, if

5 we could turn to order 98/19 of the Board's

6 procedural, second procedural order.

7 And I'd like to focus you on page 4,

8 please and item 17, sir, says:

9 "Cost of service study results

10 limited to options for bill

11 mitigation based on the currently

12 approved and utilized methodology,

13 including the issue of the heating

14 value margin deferral."

15 Do you see that?


17 MR. BRENT CZARNECKI: And you're also

18 aware, sir, that in that same order that the after

19 considering your evidence and every other party's pre-

20 filed evidence to this hearing, that the Board decided

21 to have a deferred cost of service matters to a

22 separate proceeding, which is to be determined and to

23 be coming?


25 MR. BRENT CZARNECKI: So, Mr. McLaren,



661

1 with that background I was a little surprised this

2 morning, as were the Centra people, perhaps if we look

3 at your presentation from this morning, I believe it

4 was on page 8. Thank you.

5 Where you have consideration of RCC

6 ratios is a, and it's emphasized, rate design matter.

7 Would that have been contemplated by

8 the other Board orders we just went by as being out of

9 scope for this proceeding?

10 MR. ANDREW MCLAREN: I'm not sure

11 whether the Board intended that to be out of scope or

12 not.

13 MR. BRENT CZARNECKI: Okay. And --

14 and where is the uncertainty coming from, sir, based

15 on what we just reviewed?

16 MR. ANDREW MCLAREN: I think at times

17 people maybe co-mingled the idea about what is cost of

18 service and what is rate design and whether those two

19 things intersect, and I know that we've had some

20 people discuss that zones of reasonableness are a cost

21 of service method, and at times other people call that

22 a rate design method, and so I think maybe there are

23 circumstances where we aren't maybe as precise about

24 which step we're in when we're talking about those

25 types of things.



662

1 MR. BRENT CZARNECKI: Would you agree

2 with me, Mr. McLaren, that issues of cost of service

3 and rate design such as a zone of reasonableness are

4 very complex and complicated?

5 MR. ANDREW MCLAREN: Yes, I'd agree

6 with that.

7 MR. BRENT CZARNECKI: And that

8 principles aside, that those complexities may lead a

9 panel such as this to have an independent and separate

10 hearing to evaluate all of the options that might be

11 at -- on the table?

12 MR. ANDREW MCLAREN: I would agree the

13 Board could certainly choose to go that path, yes.

14 MR. BRENT CZARNECKI: And -- and in

15 fact, this Board has chosen that path, am I correct?

16 MR. ANDREW MCLAREN: It's chosen that

17 path with respect to changes to the current cost of

18 service study methods, yes.

19 MR. BRENT CZARNECKI: From your

20 presentation this morning, Mr. McLaren, I -- I think I

21 heard you correctly when you were reviewing the hydro

22 cost of service principles where you said that the

23 principles apply equally to Centra.

24 Did -- did I hear that correctly?

25 MR. ANDREW MCLAREN: I think those



663

1 principles are also relevant in considering natural

2 gas utility rates, yes.

3 MR. BRENT CZARNECKI: Principles are

4 principles and I'm not to -- to debate the principles

5 with you. But my point with you is that the

6 principles may actually apply differently to a natural

7 gas utility, such as Centra, as it would an electric

8 utility?

9 MR. ANDREW MCLAREN: I think if you

10 have different sets of facts, the principles may be

11 applied differently.

12 MR. BRENT CZARNECKI: Of course,

13 naturally. And -- and, again, how the principles

14 would apply to Centra in this case again would be a

15 subject for the -- the proceeding that the Board has

16 envisioned for Centra, the future proceeding --

17 MR. ANDREW MCLAREN: It --

18 MR. BRENT CZARNECKI: -- correct?

19 MR. ANDREW MCLAREN: It could

20 certainly be considered there. I don't know the Board

21 necessarily needs to limit it to only that path.

22 MR. BRENT CZARNECKI: Mr. McLaren, in

23 your pre-filed evidence, I think it was Exhibit IGU10

24 -- if we could pull that up, please.

25



664

1 (BRIEF PAUSE)

2

3 MR. BRENT CZARNECKI: At page 10.

4 Scroll down. There's three (3) recommendations.

5 MR. ANDREW MCLAREN: Maybe page

6 numbered 10, not page 10 on the PDF, I think.

7 MR. BRENT CZARNECKI: Right. Yeah,

8 right there. Thank you. Focussing on the last bullet

9 there you have, sir, where you say:

10 "The Board should consider retaining

11 its own independent expert to

12 prepare a report with

13 recommendations that is available to

14 all parties.

15 This could help alleviate some

16 procedural fairness concerns about

17 only certain parties being granted

18 access to confidential materials."

19 Do you remember that recommendation?


21 MR. BRENT CZARNECKI: Can you just

22 elaborate on your thinking behind that recommendation?

23 MR. ANDREW MCLAREN: So, we went

24 through a process in this current proceeding to gain

25 access to some of the confidential portions of



665

1 Centra's filing.

2 We eventually were granted access to a

3 portion of the confidential filing, not the entire

4 confidential filing. And it also arrived

5 substantially later in the proceeding than it was

6 provided to other parties.

7 And I understand that in the interim,

8 between when the Board has previously reviewed

9 Centra's cost of service study and today, that the

10 environment that Centra operations in has changed, and

11 that has led to Centra being -- having increased

12 concerns about sharing publically certain amounts of

13 the information.

14 And much of that information is -- is

15 integral to understanding how the cost of service

16 study works. And prior to having access to the

17 confidential information, it's really difficult to

18 understand how the numbers are working and -- and

19 where numbers are coming from.

20 So, I know that that is a process the

21 Board has used before in terms of having an

22 independent expert and that that may limit the need to

23 distribute some of that confidentially -- or

24 commercially sensitive information.

25 And that type of process may help limit



666

1 the expose to that information, limit the number of

2 people who need to see that information.

3 MR. BRENT CZARNECKI: Thank you for

4 that, sir. Those are my questions, Mr. Chairman.

5 Thank you.

6 THE CHAIRPERSON: Thank you, Ms.

7 Czarnecki. Mr. Meronek...?

8 MR. BRIAN MERONEK: You're not

9 imagining things, Mr. Chair. We have an uneasy reli -

10 - alliance here between Centra and CAC. But in case

11 that breaks apart, we have a chair in-between us.

12

13 CROSS-EXAMINATION BY MR. BRIAN MERONEK:

14 MR. BRIAN MERONEK: Good morning.

15 Just following up on Mr. Czarnecki's questions about

16 the zone of reasonableness, do I have this correctly,

17 that clearly Centra and CAC has taken the position

18 that the zone of reasonableness is a cost methodology

19 issue that's to be deferred?

20 You don't agree with that?


22 MR. BRIAN MERONEK: You also recogni -

23 - you're not labelling it as a rate design issue?

24 MR. ANDREW MCLAREN: I provided a

25 comment or the Board made that determination, yes.



667

1 MR. BRIAN MERONEK: So -- and Mr.

2 Czarnecki indicated to you that that's out of scope,

3 as well, correct?

4 MR. ANDREW MCLAREN: He indicated

5 that's his view, yes.

6 MR. BRIAN MERONEK: So, I'm having

7 trouble determining how any discussion about zone of

8 reasonable is in scope in this particular hearing.

9 Can you help me out?

10 MR. ANDREW MCLAREN: I think the

11 answer I've given there is that sometimes these ideas

12 are complicated and get co-mingled. And that may be

13 something that is appropriate for argument, the degree

14 to which certain issues are in scope or out of scope,

15 and the Board can make a determination to that effect.

16 MR. BRIAN MERONEK: Now, if you could

17 turn to your evidence, and just not to beat a dead

18 horse, with respect to zone of reasonableness. And I

19 looked at your presentation. It starts at page 9 and

20 goes through to page 11.

21 Would you agree with me, sir, that that

22 aspect of your direct evidence is really argument and

23 not evidence, other than the -- the reference to your

24 IGU McLaren-22?

25 MR. ANDREW MCLAREN: I provided it as



668

1 context for the Board. I'm not sure whether I can

2 make a determination whether it's evidence or

3 argument.

4 MR. BRIAN MERONEK: You spoke earlier

5 about in support of looking at a zone of

6 reasonableness that made mention of it being used

7 previously or historically with respect to Centra.

8 Did I understand your evidence

9 correctly?


11 MR. BRIAN MERONEK: Were you around in

12 1996? I don't mean were you born, but were you --

13 were you involved in Centra Gas matters in 1996/1997?

14 MR. ANDREW MCLAREN: I was not.

15 MR. BRIAN MERONEK: All right. So,

16 you were not aware that prior to 1997 there was a zone

17 of reasonableness incorporated into gas matters at 97

18 to 103?

19 MR. ANDREW MCLAREN: I understand that

20 upon reviewing Ms. Derksen's evidence.

21 MR. BRIAN MERONEK: All right. And

22 then, in 1997 were you aware that the Board ordered

23 that -- or at least the -- that the push was to unity

24 based upon the urge -- urging of high-volume

25 customers?



669

1 MR. ANDREW MCLAREN: I understand from

2 reviewing Ms. Derksen's evidence, which was very

3 helpful, on the history and the context here that that

4 was sort of a -- implemented as a balance to,

5 including the peak and average method which, as I

6 understand it, was included in part to build a

7 consideration of fairness and equity into the cost of

8 service study itself and that, given that that

9 consideration of fairness and equity was addressed in

10 the cost of service study, it didn't need to be

11 further addressed in selecting an appropriate zone of

12 reasonableness.

13 And, on that basis, customer rates

14 should be set to unity to a hundred percent cost of

15 service.

16 MR. BRIAN MERONEK: And again, you're

17 getting this from Ms. Derksen's recitation?


19 MR. BRIAN MERONEK: Now, while we're

20 on page 10, just looking at the schedule here, and I

21 think it was discussed to some extent yesterday, if

22 you look down at line 5 -- do you have that, sir?


24 MR. BRIAN MERONEK: It talks about

25 coincident demand method. Do you see that?



670


2 MR. BRIAN MERONEK: Could you indicate

3 to me what your understanding of 'coincident' is?

4 MR. ANDREW MCLAREN: At the time of

5 the system peak.

6 MR. BRIAN MERONEK: Do you know how

7 it's calculated?

8 MR. ANDREW MCLAREN: This was prepared

9 by Centra. It was in response to a request from us.

10 I don't know exactly which assumptions or how they

11 implemented that method.

12 MR. BRIAN MERONEK: Are you aware that

13 there are many different ways of calculating it?

14 MR. ANDREW MCLAREN: I am aware that

15 people calculate coincident demand differently in

16 different situations.

17

18 (BRIEF PAUSE)

19

20 MR. BRIAN MERONEK: Could you turn to

21 PUB/IGU/McLaren-20, please, attachment 1?

22 MR. ANDREW MCLAREN: It's -- I think

23 it's 20, not 22. Yeah.

24 MR. BRIAN MERONEK: Sorry, I meant 20.

25 Could you look at line 14, and the heading is -- or



671

1 the reference is "Blended Commodity Base WACOG Rate,"

2 which is an acronym for 'Weighted Average Cost of

3 Gas'.

4 Do you know what a -- could you explain

5 what a blended commodity base WACOG is?

6 MR. ANDREW MCLAREN: So there are a --

7 a number of -- I believe this was discussed yesterday

8 -- there are a number of different entry points and

9 different points in the year when gas is delivered to

10 Manitoba Hydro's system.

11 And so you have a single number which

12 is a blended or weighed average, but it is not uniform

13 throughout the year; it is made up of a number of

14 different points throughout the year, and those may

15 vary from what the weighted average is.

16 MR. BRIAN MERONEK: Would you -- would

17 you agree that it -- it really just excludes rate

18 riders?

19 MR. ANDREW MCLAREN: Oh, it also does

20 that, yes.


22 that blended commodity-base WACOG rate is calculated?

23 MR. ANDREW MCLAREN: I believe that's

24 done in the portion of the filing that is CSI that IGU

25 was not granted access to.



672

1 MR. BRIAN MERONEK: Can you explain why

2 the blended commodity-base WACOG rate is the same for

3 each customer class?

4 MR. ANDREW MCLAREN: I was asking this

5 question to fill out a table for the board that the

6 board asked to -- I had to make a number of

7 assumptions. I believe I put caveats on it to say

8 this is entirely illustrative. I was not -- and not

9 necessarily even recommending that this be adopted. I

10 was trying to be responsive to the Board.

11 I also was sensitive to a lot of the

12 information that you would need to do this on an

13 actual basis is considered commercially sensitive.

14 And so there are numbers in performing assumptions.

15 This was -- this table was intended simply to

16 illustrate a point; it was not intended to develop

17 rates that the Board could ever implement.

18 MR. BRIAN MERONEK: Could you look at

19 I -- Information Request IGU/CENTRA-1-27A, please.

20

21 (BRIEF PAUSE)

22

23 MR. BRIAN MERONEK: Page -- page 3 of

24 5, please. Stop there, please. Yeah. It reads:

25 "The calculation of each month's



673

1 heating value margin deferral begins

2 with the calculation of the variance

3 in gas volumes consumed by customer

4 class as a result of the variance in

5 the actual heating value of gas

6 received for that period."

7 Do you see that, sir?



10 that's calculated?

11 MR. ANDREW MCLAREN: Again, I don't

12 have access to that information, so I haven't been

13 able to independently confirm the calculations.

14 MR. BRIAN MERONEK: Could you turn to

15 CAC Information Request IGU-1-2, please.

16

17 (BRIEF PAUSE)

18

19 MR. BRIAN MERONEK: You can stop

20 there. You indicate in Information Request Answer B,

21 in part, that for cost of service results, Mr.

22 McLaren's position is that the methodology that

23 underpins the cost responsibility results is

24 unreliable. Do you see that, sir?




674

1 MR. BRIAN MERONEK: In other words,

2 you're saying that it's flawed?


4 MR. BRIAN MERONEK: Can you advise the

5 board if, at any time prior to this hearing, that IGU

6 made any presentation to the Board or gave the Board

7 notice that this cost of service -- the integrity of

8 the cost of service methodology was unreliable or

9 flawed?

10 MR. ANDREW MCLAREN: Sorry, can you

11 repeat that question, please?

12 MR. BRIAN MERONEK: Yes, it -- can you

13 advise as to whether ICGU, your clients, at any time

14 per -- in the last fifteen (15) years, made it known

15 to the Board that the cost of service methodology was

16 unreliable or flawed?

17 MR. ANDREW MCLAREN: I haven't

18 participated prior to this proceeding, and I can't

19 comment on prior to this proceeding.

20 MR. BRIAN MERONEK: And I suppose your

21 answer would be the same, that you don't know whether

22 IGU's challenged the allocation of heating-value

23 deferral account at any time when refunds were being

24 granted to ICGU customers?




675

1 (BRIEF PAUSE)

2

3 MR. BRIAN MERONEK: Thank you, Mr.

4 Chairman. Thank you, Mr. McLaren.

5 THE CHAIRPERSON: Thank you, Mr.

6 Meronek. We're going to take our first break. We'll

7 break for twenty (20) minutes. Thank you.

8

9 --- Upon recessing at 9:47 a.m.

10 --- Upon commencing at 10:07 a.m.

11

12 THE CHAIRPERSON: Yes, Ms.

13 Steinfeld...?

14

15 CROSS-EXAMINATION BY MS. DAYNA STEINFELD:

16 MS. DAYNA STEINFELD: Thank you, Mr.

17 Chair, and good morning, Mr. McLaren.

18 I'd like to start with you on the issue

19 of the heating value margin deferral account, and if

20 we could bring up slide 4 of your presentation from

21 this morning, IGU 14.

22 And on this slide, the second bullet,

23 it says:

24 "Centra's revenue risk is different

25 for different classes of customers



676

1 as a result of the different rate

2 designs for each class."

3 Do you see that there?


5 MS. DAYNA STEINFELD: I'm wondering if

6 you can just help me understand a little bit better

7 what you're saying there, why is the revenue risk

8 different because of the different rate designs?

9 MR. ANDREW MCLAREN: So Centra's rate

10 design, which Mr. Hacault walked through in some

11 detail yesterday, has three basic components.

12 There is a customer charge, which is

13 charged as a single monthly charge to each customer

14 each month. There are demand charges that are based

15 on the peak demand that each customer imposes on the

16 system and that demand charge not all customer classes

17 have a demand charge, it's only the higher use

18 customer classes that have a demand charge.

19 And then there's a volumetric charge,

20 which is charged per volume, cubic metre of -- of gas

21 that is delivered.

22 And when we were evaluating -- when we

23 reviewed the issue of the heating value deferral

24 margin account, the Christensen report from 2012 noted

25 that the special contract customer class, their rates



677

1 are almost entirely a customer charge.

2 So there -- none of their revenue to

3 Centra turns in particular on any demand or volumetric

4 charge. And we asked Centra and IR to -- asked Centra

5 to judge for each of those components a customer

6 charge, a demand charge and an energy or volume

7 charge, how much can those vary as a result of

8 changing and heating value.

9 And Centra gave us a response that I'm

10 going to paraphrase, but it is on the record, people

11 can check the wording, that the customer charge,

12 there's basically no variation in customer charge as a

13 result of heating value. If the heating value changes

14 it doesn't impact the way the customer charge is

15 charged at all.

16 On demand charges, I believe the word

17 Centra used was that there may be a slight impact on

18 demand charges as a result of their -- of variances in

19 heating value. But there's a greater impact on the

20 volumetric charge.

21 And so when we looked at that, we

22 looked at each of the different rate classes, the

23 total revenue from those classes depends on each of

24 those charges in a different proportion.

25 And so as I mentioned, the special



678

1 contract, it's almost all customer charge.

2 For the small general service class,

3 there's no demand charge, but there's a much bigger

4 portion of their -- of their total revenue that

5 depends on the volumetric charge.

6 And so because of those differences,

7 and because the heating value effects the different

8 components differently, that means that the revenue

9 risk is different for each customer class.

10 MS. DAYNA STEINFELD: Thank you.

11 And that forms then the basis for your

12 evidence where you recommend that the heating value

13 margin deferral account be allocated to the different

14 customer classes based on non-gas volumetric revenue,

15 correct?

16 MR. ANDREW MCLAREN: Correct, that was

17 the improvement that I explored and put in my

18 evidence, yes.

19 MS. DAYNA STEINFELD: And if we turn

20 to PUB Exhibit 25, book of documents at page 269, this

21 is a page from Centra's rebuttal evidence and this is

22 a table that I believe shows the allocation of the

23 deferral account based on volumetric revenues.

24 Is that your understanding?

25 MR. ANDREW MCLAREN: This table shows



679

1 both versions, I believe. One based simply on

2 volumes, which are the rows -- row 5 and 6.

3 And then rows 8 and 9 are the version

4 based on revenue. So -- so basically volumes weighted

5 by the revenue that depends on those volumes.

6 MS. DAYNA STEINFELD: And do rows 8

7 and 9 reflect the recommendation in your evidence?

8 MR. ANDREW MCLAREN: I believe this is

9 Centra's example -- illustrative example of what it

10 would look like if they implemented my recommendation,

11 yes.

12 MS. DAYNA STEINFELD: And you don't

13 take any issue with how they've prepared this, you

14 wouldn't necessarily do this any differently?

15 MR. ANDREW MCLAREN: It is consistent

16 with the -- the math that I've done, they have better

17 access to more of the information needed to do this

18 than I do, so I have no reason, it's -- it's certainly

19 very close to what I had calculated myself, yes.

20 MS. DAYNA STEINFELD: And if rows 8

21 and 9 are implemented by this Board as the method of

22 allocating the deferral account, would in your view

23 this then precisely align the allocation with the

24 accumulation into the account?

25 MR. ANDREW MCLAREN: Okay. That was



680

1 the intent, was I was trying to find a way to have the

2 disposal of the dollars in the account, the -- to each

3 customer class better track the degree of revenue risk

4 that Centra experiences, due to the heating value

5 variation. That was the improvement I was trying to

6 explore with Centra and they, in their rebuttal,

7 provided this table which was quite helpful.

8 MS. DAYNA STEINFELD: And if we could

9 bring up PUB CAC 1. And just scroll down to the

10 response. That's good there, thank you.

11 This is an IR response from Ms. Derksen

12 and you're at the bottom of the page here, it says:

13 "The illustrative example does not

14 consider the contribution made to

15 actual heating value content flowing

16 from volumes of gas delivered to the

17 Manitoba border from the special

18 contract class, other T-Service

19 customers, or demand billed

20 customers."



23 MS. DAYNA STEINFELD: And the

24 illustrative example that Ms. Derksen is referring to

25 is essentially the same if not identical to the



681

1 illustrative example that the Board asked you to

2 prepare that you reviewed earlier in your evidence

3 today.

4 MR. ANDREW MCLAREN: That's my

5 understanding, yes.

6 MS. DAYNA STEINFELD: And did you

7 consider this concern raised by Ms. Derksen when you

8 were looking at the illustrative example?

9 MR. ANDREW MCLAREN: So I accept that

10 with respect to the demand charges, and I think the

11 information from Centra was that heating value may

12 have a slight impact. I believe I've used the right

13 word there, slight was their word. So I accept that

14 it's -- it's not zero, but it's lower and by use of

15 the word "slight", I interpret it quite a bit lower

16 than the revenue risk related to the volume charge.

17 So I accept there are some

18 imperfections, perhaps, but I do think directionally

19 the intent was to try and come up with something that

20 was a little bit better than strictly straight

21 volumes.

22 And we know that the straight volume

23 approach has that particular problem for the special

24 contract customer class. The special contract

25 customer class is the easy extreme example. And I --



682

1 I don't think it's disputed really by anybody that

2 their revenue risk related heating value is virtually

3 zero as a result of their rate design, which is almost

4 entirely a customer charge.

5 What I was trying to do was to see if

6 there was a way to -- I think that's the easy one, the

7 easy example for people to get their heads around, but

8 I was trying to explore whether there was a better way

9 to reflect the differences in rate design in the other

10 classes in the allocation. And so that's the topic

11 that I was trying to explore, that's why I put it in

12 my evidence and Centra addressed that in the rebuttal

13 evidence.

14 But I -- I accept there are some

15 imprecisions or imperfections that are potentially not

16 addressed in that method.

17 MS. DAYNA STEINFELD: And I -- I take

18 your answer just now to be referring to the demand

19 related variations and the heating value.


21 MS. DAYNA STEINFELD: Do you

22 understand Ms. Derksen is also identifying a concern

23 related to what I'll call the co-mingling of gas that

24 is -- the gas that Centra brings into the system and

25 the gas that is nominated by other customers?



683

1 MR. ANDREW MCLAREN: Yes, I understand

2 that. I think I talked a little bit about that

3 earlier, that when we look at some of these values,

4 they're averaged over the course of the year, but that

5 average is made up of variations throughout the year

6 and different times of day and different seasons.

7 The -- the value may not be exactly the

8 same and it may not be the same for deliveries at one

9 point on Centra's system compared to deliveries on a

10 different point on Centra's system.

11 MS. DAYNA STEINFELD: And do you see

12 that as an issue in terms of allocating the deferral

13 account on the basis of non-gas volumetric revenue?

14 MR. ANDREW MCLAREN: I think if it

15 were reasonable or practical to disentangle that, it

16 may be something the Board wants to consider.

17 I don't think that -- certainly I know

18 I certainly don't have the information to be able to

19 do that. I believe that question was posed to

20 Centra's panel yesterday and they didn't see a

21 reasonable or practical way to do that.

22 And so I think on -- on balance, as I

23 mentioned, I think the case for the special contract

24 classes is pretty clear.

25 What I was trying to explore was is



684

1 there a way to better link those costs than we are

2 today to the revenue risk that is really to the rate

3 design. I accept it probably hasn't solved every

4 problem under the sun, but directionally I was trying

5 to show the Board or explore with the Board whether

6 there was a better way to do it for more than just the

7 special contract class.

8 MS. DAYNA STEINFELD: And I took it

9 from your direct evidence earlier today that your view

10 is that even if the Board does not view the heating

11 value deferral margin account issue as a bill

12 mitigation matter, this is a change that should

13 nonetheless be made because of the mismatching in the

14 accumulation and the disposition of the account?

15 MR. ANDREW MCLAREN: Yes, I think this

16 is a change that should be done regardless of whether

17 the Board decides there is bill mitigation required

18 for these customers.

19 And in particular this issue is

20 something that's been in the -- in the works and

21 recognized and accepted by Centra, at least with

22 respect to the special contract class for six (6) or

23 seven (7) years now.

24 So I don't think this is something that

25 needs to be put under the heading of bill mitigation,



685

1 I think this is something the Board has enough

2 information to make a decision that a change here is

3 warranted and necessary to better reflect the costs.

4 MS. DAYNA STEINFELD: And is that a

5 change that you recommend the Board make in the test

6 year?


8 MS. DAYNA STEINFELD: Do you accept

9 that there is a concern that Centra has raised about

10 fairness to other customers given that the special

11 contract class received a benefit through refunds to

12 customers over a period of time and would, on your

13 recommendation, not be responsible for a refund to

14 Centra?

15 MR. ANDREW MCLAREN: I understand

16 Centra has raised that in an IR response. I have some

17 rather significant concerns about that approach from a

18 retroactive rate making sort of perspective.

19 I think Mr. Hacault walked through some

20 of the timeline for some of those decisions, I think

21 he would be asking the Board to unwind decades of

22 previously approved and final rates in order to do

23 that.

24 I also would caution that in attempting

25 to balance the ledger, there is no guarantee this



686

1 account will continue to have charges going forward.

2 It may, in fact, have credits and Centra, even after

3 accepting the recommendation, is my understanding has

4 continued to apply this method during periods where

5 there are both credits and charges.

6 And so if there were concerns about

7 maybe this customer shouldn't be getting credits, the

8 method must continue to apply, even after Centra had

9 accepted that that outcome probably isn't reasonable,

10 given the rate design for that customer class.

11 So I'd have some concerns about using

12 that justification to keep this going forward.

13 MS. DAYNA STEINFELD: But your

14 recommendation would mean if accepted in the test

15 year, that the other customer classes, including SGS,

16 would have to pick up more of the tab for the refund

17 to Centra?

18 MR. ANDREW MCLAREN: Better matching

19 the cost would mean the customers who contribute to

20 the risk would pay more, yes.

21 MS. DAYNA STEINFELD: And I take it

22 you don't view that as a fairness concern?

23 MR. ANDREW MCLAREN: I don't think

24 that's a reason not to do it.

25 MS. DAYNA STEINFELD: Okay, and why is



687

1 that?

2 MR. ANDREW MCLAREN: I think that the

3 Board has an opportunity to correct a rate design that

4 is imperfect, poorly tracks the revenue risk and it's

5 a material issue to the IGU customers in this

6 proceeding, it's not a trivial amount of dollars that

7 we're talking about and I think the Board has an

8 opportunity to correct that in this proceeding.

9 MS. DAYNA STEINFELD: If we can bring

10 up your slide 5 from IGU 14. At the bottom of this

11 slide you reference the recommendation from Ms.

12 Derksen to eliminate the heating value deferral

13 account and -- and note that it would eliminate the

14 problem of the allocation of the balances.

15 I'm not clear if this is a

16 recommendation that you agree with, that you're

17 recommending that the Board pursue?

18 MR. ANDREW MCLAREN: I think in the

19 context of the current proceeding, we have a balance

20 that Centra is trying to discharge if -- and it's not

21 an immaterial amount of dollars, it's relatively

22 significant, it's higher than it's been in -- in many

23 cases in part because of the number of years that

24 Centra is trying to discharge.

25 I believe it's about four (4) years



688

1 worth of accumulation, right now, that are being

2 sought to be discharged.

3 And so the timing of eliminating that,

4 if you eliminate it today, it would certainly get rid

5 of the IGU concern. But then Centra would have a

6 relatively significant balance that it would not

7 collect.

8 So this may be something that could be

9 considered on a go-forward basis. If it were

10 implemented today it certainly would solve our

11 problem. But I believe there is a -- an option that

12 would solve our problem that may not result in Centra

13 not collecting its accumulated balance to date.

14 MS. DAYNA STEINFELD: I'm going to

15 move on from the heating value deferral account, as

16 much as well love that topic, to the issue of billed

17 rate impacts.

18 And maybe just to pick up on a point

19 that you were reviewing with Mr. Meronek. Ms.

20 Villegas, if we could bring up Order 99/07, page 77.

21 And there this Board Order is giving a

22 summary of the position taken by the Intervenor Koch

23 in that proceeding, and at the bottom of the page it

24 says:

25 "Koch disagreed with Centra's



689

1 proposed increase and special

2 contract class rates related to

3 increased transmission costs for the

4 following reasons: a) though the

5 section of pipeline serving Koch

6 also provides natural gas to other

7 customers, expenditures on that

8 section of pipeline are easily

9 definable and could be easily and

10 more fairly allocated to Koch."



13 MS. DAYNA STEINFELD: And the answer -

14 - or the summary goes on to discuss cost decreases in

15 the allocation of transmission and -- and distribution

16 costs.

17 Do you see that?


19 MS. DAYNA STEINFELD: And I take it

20 you weren't familiar with this order in your

21 discussion with Mr. Meronek earlier?

22 MR. ANDREW MCLAREN: I had not

23 previously reviewed this, no.

24 MS. DAYNA STEINFELD: Does it change

25 your answer to the question of whether any member of



690

1 IGU had previously raised concerns about the Centra

2 cost allocation methodology?

3 MR. ANDREW MCLAREN: I think my answer

4 was that I didn't have any experience prior to this

5 proceeding, so I couldn't comment on it. I don't

6 think that portion of my answer changes. I wasn't

7 here for this proceeding.

8 I would say that this appears to

9 suggest that, at that time, Koch, not represented by

10 me or me even being in this hearing, had some concerns

11 in that regard.

12 MS. DAYNA STEINFELD: And it --

13 jumping forward to today, 2019, in this proceeding, do

14 I take it that your primary position is that the Board

15 should not approve any rate adjustments or changes for

16 any customer class until the cost of service study

17 methodology has been reviewed?

18 MR. ANDREW MCLAREN: So I have a lot

19 of sympathy for the position the Board is in in this

20 hearing for a number of reasons: the number of years

21 since this has been reviewed; the number of changes,

22 perhaps, evolution of thinking on cost of service

23 principles; the rate rollback; all of these types of

24 things -- changes in Centra's system, including

25 changes in investment in transmission assets and also



691

1 changes in the interruptible loads that are on the

2 system, which may have been a bigger driver in the

3 past in terms of choosing or selecting certain cost of

4 service methods.

5 So I think my positions is, the Board

6 has a landscape to consider. At one end, I think, we

7 have established that the Board's view is that cost of

8 service studies aren't perfect, and so driving to

9 unity is not something that you -- has any particular

10 meaning. And so on that basis, whether you choose

11 97/103 or 95/105, there's some range that is just --

12 cost of service studies are imperfect, and so you

13 don't have a meaningful way to get to 100 percent.

14 At the other end, with respect to

15 Manitoba Hydro cost of service study, when the Board

16 decided it couldn't rely on it at all, the Board

17 instructed the Utility to implement across-the-board

18 rate increases that basically ignore the cost of

19 service results and just say, All customers are going

20 to get equal treatment.

21 The issue I think the Board has in

22 front of it today is, where are we on that landscape?

23 What is the Board's tolerance level? How much

24 confidence do they have? Are they confident enough

25 that they can just use the end of the spectrum where



692

1 you say, They're not perfect, but we're pretty

2 reliable. It's 95/105. We'll try and get to that

3 range. Or, Wow, we have a lot of concerns about this,

4 so many concerns that maybe we don't even use this

5 cost of service study at all. Or they may decide that

6 they're somewhere in the middle, in which case that

7 sort of wider zone of reasonableness might be

8 something they need to consider.

9 MS. DAYNA STEINFELD: And would it be

10 your view that changes in gas rates could be approved

11 independent of changes in non-gas rates separate from

12 the issues you've just identified?


14 MS. DAYNA STEINFELD: Centra suggests

15 in its rebuttal evidence that a way to mitigate the

16 billed rate impacts to the special-contract class and

17 other high-volume classes would be to extend the

18 payment terms for the collection of the deferral

19 balances. Are you familiar with that evidence?

20 MR. ANDREW MCLAREN: Yes, I was here

21 during that presentation.

22 MS. DAYNA STEINFELD: Do you have

23 views on -- on that as an option for bill mitigation?

24 MR. ANDREW MCLAREN: I think we

25 discussed earlier that the changes I'm recommending



693

1 for the heating value deferral account, I'm not

2 recommending as a bill mitigation tool. I'm

3 recommending based on the fact that I think the Board

4 has pretty reliable information to say that the

5 current method doesn't really track the revenue risk

6 very well, particularly for the special-contract

7 class, but also, to a degree, for some of the other

8 classes.

9 I think if you accept that

10 recommendation, then the deferral-period approach

11 becomes no longer necessary. I do agree that, at

12 times, I have seen and -- seen deferral accounts

13 balances been recovered over a longer period as a bill

14 mitigation or rate shock mitigation tool, so it is

15 something that I think has some precedent and

16 standards. It would not be my preferred outcome here

17 because I think the Board has enough information

18 available to it to decide that the special-contract

19 customers shouldn't be paying those amounts at all.

20 MS. DAYNA STEINFELD: And if we pull

21 up your slide 12, just dealing with the other options

22 that have been identified, you note on the slide the

23 evidence of Ms. Derksen regarding potential deferral

24 of the revenue requirement collection for the

25 transmission assets for the large-volume customers,



694

1 and I believe your evidence was that this is a

2 legitimate option. Do I -- do I have that right?

3 MR. ANDREW MCLAREN: Certainly, I have

4 seen utilities who have large capital projects that

5 impact rates say, We'll take a deferral-account

6 approach to this. We'll put the total costs into a

7 deferral account and sort of phase them into the

8 revenue requirement over time.

9 And typically -- and I believe this was

10 explored with Mr. Chard and Ms. Gregorashuk yesterday

11 -- typically that deferral account would attract some

12 carrying costs in the interim period, so we'd be

13 charging interest or a return on that balance while it

14 is sitting there waiting to be collected. But I agree

15 this is an approach that has been used at times.

16 Again, I think, perhaps, if we address

17 some of those other concerns with respect to a zone of

18 reasonableness, maybe this option doesn't need to be

19 implemented because we have it -- we've already

20 addressed the issue in a way that solves the bill

21 mitigation problem before we get to this step. But it

22 is a method that I have seen used in other places and

23 has been approved in other times.

24 MS. DAYNA STEINFELD: It's a

25 legitimate method, but you don't believe it's -- it's



695

1 preferable because of those issues that you've just

2 identified, and the recommendations in your evidence

3 would better deal with the concerns.

4 MR. ANDREW MCLAREN: I think that's a

5 fair summary, yes.

6 MS. DAYNA STEINFELD: Thank you. You

7 were starting to segway into the zone of

8 reasonableness, so let's go there. If we can stay on

9 IGU 14 and go to slide 8, please, and I believe this

10 slide goes to your point in your evidence that the

11 Board should consider allowing some discretion in the

12 revenue to cost coverage ratios through the use of a

13 zone of reasonableness. Is that a fair summary?

14 MR. ANDREW MCLAREN: yes.

15 MS. DAYNA STEINFELD: And one (1) of

16 the points that you made in your direct evidence is

17 that doing so would not require a change in the

18 current methodology of the cost of service study.

19 MR. ANDREW MCLAREN: Yes, I believe

20 you can address the degree to which rates are set to

21 reflect revenue to cost coverage ratios calculated in

22 a cost of service study independently of reviewing the

23 specific methods in the cost of service study.

24 MS. DAYNA STEINFELD: And Ms.

25 Villegas, if we can please pull up the response to IGU



696

1 Centra Round 2 Question 13A.

2

3 (BRIEF PAUSE)

4

5 MS. DAYNA STEINFELD: And if we can

6 just scroll down to the response to Question A. Right

7 there is perfect. Here it says:

8 "Centra's cost allocation model

9 produces ratios that are set at

10 unity; therefore, the requested

11 analysis cannot be performed."



14 MS. DAYNA STEINFELD: And I believe --

15 and we can scroll back up to the question -- but I

16 believe that the question was seeking, essentially,

17 different non-gas rates based on different revenue to

18 cost coverage ratios and different zones of

19 reasonableness. Is that your understanding?


21 MS. DAYNA STEINFELD: And so I take it

22 that you're saying you don't need to change the cost

23 of service study methodology, but is it the case that

24 in this proceeding, we don't have evidence of what the

25 rates might look at based on zon -- different zones of



697

1 reasonableness because of the way the cost allocation

2 model currently is run?

3 MR. ANDREW MCLAREN: I think I

4 discussed this a little bit earlier, that at times

5 there's maybe some imprecision or commingling of

6 exactly which step in the rate-setting process we're

7 at between cost of service and rate design, and some

8 people may think a particular step is conceptually

9 part of doing a cost of service study. Other people

10 say, No, it's sort of the first step in a rate design

11 proposal. And so I think as a result of that, we

12 maybe didn't get the information we were looking for

13 in response to this question.

14 So do we have the specific rates

15 available that the Board could approve? I don't think

16 we do at the moment, and if the Board decided to want

17 to do that, it would probably require a compliance

18 filing for people to have a chance to have a look at

19 what those numbers would look like.

20 MS. DAYNA STEINFELD: And if we go

21 back to your presentation and go to slide 10. And

22 here in your evidence you were discussing how if you

23 have different cost of service study methodologies,

24 you'll see changes in the revenue to cost coverage

25 ratio results.



698

1 Am I correct in understanding that the

2 concern that you're identifying is that if you set

3 rates now based on the current methodology, and then

4 the methodology is changed in a future proceeding,

5 that you could just create the opposite problem where

6 now classes that looked to be significant under the

7 zone or reasonableness or unity are now perhaps

8 significantly over -- or maybe not significantly, but

9 they've gone the other way?

10 MR. ANDREW MCLAREN: Yes. I think

11 that is the risk, particularly for the higher volume

12 customer classes, the high volume firm, mainline, and

13 special contract classes.

14 The point of this table was to say a

15 lot turns on this particular issues and it moves

16 numbers around an awful lot. And that's part of the

17 reason why it is controversial, as I believe Ms.

18 Derksen said in her evidence.

19 So, when you look at the -- the impact

20 to the small general service class, the change in the

21 method, the dollars involved aren't tiny, they're not

22 insignificant, but the RCC ratio movement isn't that

23 dramatic.

24 On the other hand though, for the

25 special contract class it's very dramatic in terms of



699

1 what RCC ratio you achieve.

2 So, that, I think, was the caution, was

3 saying, if we have a cost of service study method that

4 sort of imbeds some of these considerations of

5 fairness that may have been appropriate in the

6 landscape the Board was dealing with at the time, that

7 a lot of dollars depend on that decision.

8 And if that's something that the Board

9 is now with new circumstances, with a different amount

10 of transmission investment, with a different amount of

11 interruptible load on the system that the Board is no

12 longer comfortable with, there's a big range that

13 might be the outcome of here.

14 And I think your summary in terms of

15 what that might do to push a special contract class,

16 you know, sort of over correct in the wrong direction

17 to then be yanked backwards when we get to a

18 conclusion in a cost of service methodology.

19 That -- that's really the issue this

20 table is trying to speak to.

21 MS. DAYNA STEINFELD: And, in your

22 view -- in your view, would a zone of reasonableness

23 of 95 to 105, or even 90 to 110, address the billed

24 rate impacts to IGU members in this proceeding?

25 MR. ANDREW MCLAREN: I think they



700

1 would certainly directionally address those. And I

2 think the issue for the Board, as I mentioned earlier,

3 in terms of this spectrum, is to -- is to decide how

4 far are we on the spectrum.

5 We've seen a circumstance where the

6 Board doesn't rely on the results at all. We've seen

7 a circumstance where the Board has a fairly high

8 degree of confidence in the number so uses a

9 relatively narrow zone of reasonableness.

10 I think anywhere in-between those

11 goalposts would provide some improvement in terms of

12 the impacts in terms of the IGU customers and customer

13 members.

14 MS. DAYNA STEINFELD: So, it wouldn't

15 move the needle all the way, but it would help move

16 the needle a bit?

17 MR. ANDREW MCLAREN: It would help me

18 -- move the needle a bit, yes.

19 MS. DAYNA STEINFELD: And I take your

20 point, that you see this as an issue that the Board

21 could look at to see how -- you know, they have a

22 spectrum of options and to see how far they want to go

23 on different options.

24 But do you have a recommendation in

25 terms of the zone of reasonableness that would be



701

1 appropriate?

2

3 (BRIEF PAUSE)

4

5 MR. ANDREW MCLAREN: I think in my

6 evidence I said my primary recommendation would be --

7 in my view, this cost of service study was prepared so

8 long ago and it's been so long since it's been

9 thoroughly reviewed and Centra's operating and

10 planning and cost context was so different that it's

11 probably not the most useful took to rely on at the

12 moment.

13 And, on that basis, I would be closer

14 to the don't make changes to reflect revenue to cost

15 coverage ratios today, but I know the Board may be

16 looking for an option beyond that.

17 And so, I would say somewhere in the

18 85, 115, 90 to 110 range would be consistent with a

19 range the Board has used previously and may consider

20 appropriate in this context.

21 MS. DAYNA STEINFELD: So, in -- in

22 this context, given what you've identified in your

23 evidence as what you see to be unreliabilities in the

24 cost of service study and the potential concerns that

25 could extend into future proceedings and setting rates



702

1 on those methods, you are suggesting a broad range in

2 the zone of reasonableness?

3 MR. ANDREW MCLAREN: I'm suggesting

4 we're -- we're not at that. We have a high degree of

5 confidence, so we can have a very narrow range. I

6 think we're further along the spectrum than that.

7 I think certainly 90 to 110 is a range

8 that this Board has used for other utilities at other

9 times and would be closer to where my recommendation

10 would land compared to saying we're very confident in

11 this current study, and so we can have a very small

12 zone of reasonableness.

13 MS. DAYNA STEINFELD: And what I take

14 it then, that after the Board reviews the Centra cost

15 of service study methodology you might say that a

16 different zone of reasonableness is appropriate at

17 that point?

18 MR. ANDREW MCLAREN: I think, if the

19 Board re -- if the Board accepts a cost of service

20 study that they have a higher degree of confidence in,

21 it would be appropriate to use a narrower zone of

22 reasonableness.

23 I don't think driving to a hundred

24 percent for all customer classes would be something

25 that you necessarily want to look at. I think there -



703

1 - there is a basic level of uncertainty in estimates

2 that are involved, so I think there would continue to

3 be some range, but it -- it would probably be narrower

4 than today.

5 MS. DAYNA STEINFELD: And if we can go

6 back to PUB 25 at page 284, I believe.

7

8 (BRIEF PAUSE)

9

10 MS. DAYNA STEINFELD: We spent some

11 time on this revenue to cost coverage ratio charge

12 yesterday, and I don't want to get into detail now

13 with you.

14 But would I be right in understanding

15 that, if we used a zone of reasonableness in this

16 proceeding to set rates, classes like SGS

17 interruptible could end up arguably subsidizing other

18 classes, like LGS high volume, mainline, special

19 contract?

20 MR. ANDREW MCLAREN: So, I'll note two

21 (2) things on this table. One (1) is, when you look

22 at row 8, the revenue at existing non-gas rate about a

23 152 million, and then line 10, cost of service non-gas

24 about 148.5 million, so right now, there's a --

25 there's a mismatch right there that would be



704

1 correcting.

2 I think I would encourage the Board

3 when thinking about how wide a zone of reasonableness

4 to use to say I've read the Board's decisions to say,

5 if you're within the zone of reasonableness, we don't

6 think there's a basis to say you're over or

7 underpaying. We think that those -- those rates are

8 reasonable for that purpose.

9 So, I would encourage the Board to set

10 a zone of reasonableness that they are comfortable

11 with being within that range, to be able to say that,

12 based on what we've said and set as a zone or

13 reasonableness, we're comfortable that, if -- if

14 you're within that range, we're not concerned about

15 you over or under paying.

16 So, I would think that that would be a

17 factor that the Board would want to consider in

18 setting its zone of reasonableness for this

19 proceeding.

20 MS. DAYNA STEINFELD: Even though your

21 earlier evidence was that we can't really rely on the

22 cost of service study results, you would still say

23 that, if a customer class falls within a zone of

24 reasonableness used in this proceeding, that we can

25 consider them to be fairly covering their costs?



705

1 MR. ANDREW MCLAREN: As I said

2 earlier, I have a lot of sympathy for the position the

3 Board is in in this proceeding because of the passage

4 of time and the history of rate changes and -- and

5 those sorts of things, so I -- I accept the Board has

6 a very difficult decision to make here.

7 The point in my evidence was to sort

8 of, like I said, lay out the landscape, set the

9 goalposts, and then allow -- you know, understand that

10 the Board may choose to fall somewhere within those

11 goalposts.

12 But I think at a -- at a primary level,

13 if the Board has -- if the Board is not -- the Board

14 isn't at the point where they say we don't trust this

15 at all, but instead are saying we think it's

16 reasonable to a point but maybe not to the nth degree,

17 my recommendation to the Board would be to say set a

18 zone of reasonableness based on your level of comfort

19 that within that zone of reasonableness we think our -

20 - our prior comments about, if you're in this area, we

21 don't see a basis to argue that you're over or under

22 paying based on cost causation.

23 That would be my ultimate

24 recommendation to the Board.

25 MS. DAYNA STEINFELD: And you're



706

1 familiar with the fact that there was a rate reversion

2 as a result of a -- of a prior Board order?

3 MR. ANDREW MCLAREN: Yes, I'm aware of

4 that.

5 MS. DAYNA STEINFELD: And do you

6 accept that a majority or a large portion of the bill

7 increase to mainline and high volume customers arises

8 because they had a large temporary decrease for a

9 period of time and that decrease is now being unwound?

10 MR. ANDREW MCLAREN: I accept that

11 they're -- when you look at this table that calculates

12 the revenue to cost coverage ratios, the revenue line

13 is at existing rates, so it's at rates that reflect

14 that rollback.

15 I think we had some discussion

16 yesterday about the cost of studies are a picture at a

17 point in time and do we have a full -- we don't do a

18 cost of service study every year, so at what point --

19 we -- we know at this point a customer's RCC ratio is

20 this, we know at a different point it was that.

21 Where it was in the middle is something

22 is maybe not useful to speculate on, but I -- I will

23 accept that their revenues today reflect that

24 rollback, and so the revenues that are used to

25 calculate these RCC ratios reflect that rollback.



707

1 The -- the logic for why the rollback

2 was implemented is not something that I've dealt with

3 or I think needs to necessarily be dealt with. We

4 have a set of facts. We have revenues that are --

5 that occur at existing rates, and that's what the

6 Board is evaluating today.

7 MS. DAYNA STEINFELD: But would you

8 accept that those customer classes received the

9 benefit of a bill decrease for a period of time and

10 that, arguably then, we -- the Board should perhaps

11 not be as concerned about mitigating their billed rate

12 impacts at this point in time?

13 MR. ANDREW MCLAREN: Certainly, I

14 agree that the rollback resulted in them paying lower

15 rates and lower -- and Centra incurring lower revenues

16 from them than they would have if the rates had not

17 been rolled back. I agree with that.

18 In terms of when is bill mitigation

19 necessary, I think part of what I was trying to walk

20 through with the Board was to say I think there is

21 some issues here that should be addressed prior to

22 getting to any consideration of bill mitigation.

23 I also know though that customers pay

24 bills and they're used to paying a certain set of

25 bills. And I also work for utilities, and I know you



708

1 don't -- never get as much credit for bill decreases

2 as you'd get grief for bill increases.

3 But I think there are a number of

4 things that need to be addressed before you get to a

5 consideration of bill mitigation. And I also think

6 that, if those get addressed, then the concerns about

7 needing bill mitigation are substantially reduced.

8 MS. DAYNA STEINFELD: Thank you, Mr.

9 McLaren. Mr. Chair, those are my questions of -- of

10 this witness. And I thank him for his time today.

11 THE CHAIRPERSON: Thank you, Ms.

12 Steinfeld. I believe that completes our proceedings

13 this morning, so we are adjourned to Tuesday at nine

14 o'clock. That's Tuesday, not Monday. And enjoy sunny

15 Manitoba. Good morning.

16

17 --- Upon adjourning at 10:47 a.m.

18

19

20 Certified Correct,

21

22 _____________________

23 Donna Whitehouse, Ms.

24

25

manitoba public utilities board re: centra gas …€¦ · but it's been a while since...

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